China Credit And Economic Growth To Slow Again

Since early 2014, China’s economic history has been one of start, stop reforms.

First of all, President Xi Jinping (pictured right) was in control as his “Princeling” political faction began to effectively implement the bold reform vision outlined in late 2013 at the pivotal 3rd Plenum Meeting of China’s top politicians.

The Princelings are those who can trace their heritage back to the founding fathers of China’s Communist Party. They take the long view as they see it as more important to tackle economic imbalances as soon as possible, rather than ‘kick the can down the road” by boosting the economy through short-term stimulus steps.

Evidence of control by the Princelings was the slowdown in local credit growth that took place from January 2014 onwards. Any investment bubble needs more and more air pumped into it keep that bubble stable, and so when China began to pump less air into the bubble, the economy started to slow.

Then the “Populists” gained more influence. This is the political faction, led by Prime Minister Li Keqiang, which prefers short term steps to shore-up growth rather than taking the pain now of essential reforms.

This influence was first seen through the stock market bubble in 2015 that went pop in the summer of that year, leaving investors nursing very heavy losses.

The credit bubble was re-inflated in 2016 as the Populists extended their control. Too much of the lending in 2016 was again the wrong kind of lending, as it was used to re-inflate the real estate sector and prop-up already oversupplied manufacturing industries. Take steel as an example. Capacity on a net basis has actually increased, despite government claims of major shutdowns.

Xi now appears to be back control and looks set to further cement his control at this autumn’s 19th National Party Congress meeting. That meeting might even see Li step down as prime minister, with Xi likely to be able to get some of his key supporters appointed to the Politburo – China’s top governing council.

Credit will now start slowing down again along with the economy – very probably ahead of and well beyond this autumn’s congress. Our new Study, which we publish later this month, will explain what this means for the global chemicals business.

Sentiment towards China has shifted very dramatically over the last few months as a result of the surge in oil prices, in other commodities and equity markets. A new narrative is emerging that none of the above is matters anymore. We believe this thinking is not driven by the data, but is instead just another of those stories that can be useful in keeping commodity and equity-market rallies going.

Be careful of short term amnesia. Only a few months ago, the IMF warned: China urgently needs to tackle its corporate-debt problem before it becomes a major drag on growth.

And China still needs to deal with an ageing population and its middle-income trap. What also argue in our Study is that these challenges have been made a lot harder to overcome by the arrival of Donald Trump in the White House.